Market rate cut expectations fell sharply from seven at the beginning of the year to one or two
At the beginning of this year, traders predicted that the Federal Reserve may cut interest rates as many as seven times. But now, more and more traders are betting that the Federal Reserve may only cut interest rates once or twice this year, and even a few are starting to bet that the Fed will keep interest rates unchanged.
Faced with sustained economic strength, traders have reduced their expectations for the Federal Reserve's interest rate cut, which poses a challenge to the stock market's upward momentum based on hopes of a rate cut.
At the beginning of 2024, traders predicted that the Federal Reserve may cut interest rates up to seven times. However, with the recent strong employment report indicating sustained strength in the US economy, more and more traders are betting that the Federal Reserve may only cut interest rates once or twice this year, and even a few are starting to bet that the Fed will keep interest rates unchanged.
The economic growth prospects and inflationary pressures in recent months have far exceeded previous expectations, greatly affecting the market. The Dow Jones Industrial Average has suffered its worst week since March 2023. Despite the latest employment data prompting a partial rebound in the stock market, the blue chip index still fell 2.3%, ending last week.
Faced with sustained economic expansion and inflationary pressures, Federal Reserve officials have stated that they need to see more evidence before taking action. Minneapolis President Neel Kashkari stated last week that if inflation does not ease, the Federal Reserve will temporarily postpone interest rate cuts. Dallas President Lorie Logan expressed concerns last Friday that the decline in inflation may come to a halt and warned that it is too early to consider lowering interest rates now.
As the economic performance exceeded expectations, investors gradually withdrew their expectations for a significant interest rate cut at the beginning of the year. According to FactSet data, federal funds rate futures show that the benchmark interest rate is expected to be around 4.75% by the end of this year, higher than the Federal Reserve's March forecast of 4.6%.
Traders predict that interest rates will exceed 3.85% by the end of 2026, while Federal Reserve officials predict a value of 3.1%. There is a difference of over one percentage point between the market and the Federal Reserve's views on neutral interest rates (long-term interest rates that neither stimulate nor slow down the economy).
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